Home Loans are going to get costlier

The Reserve Bank of India (RBI) recently announced a series of monetary measures that tightened the norms for home loans. The RBI also sought to discourage banks from aggressively selling “teaser loans”, which are a big hit with people who want to buy houses. The banks will have to keep more money aside for offering teaser home loans to provide cushion for any default. This will also make home loans slightly more expensive.

How does it affect new home buyer

• Ceiling on Loan to Value: RBI said that loan-to-value (LTV) ratio for housing loans should not exceed 80% of Home price. The raising of LTV ratio to 80 per cent means that any new home buyer going for a housing loan will have to bring in at least 20 per cent of the value of the property. At present, there is no regulatory ceiling on the LTV ratio in respect of banks’ housing loan exposures.

• Clamped down on Teaser home loan: The RBI also sought to discourage banks from aggressively selling “teaser loans”, which are a big hit with people who want to buy houses. The RBI has increased the standard asset provisioning on teaser loans to 2 per cent from 0.4 per cent. Till now, new borrowers could avail home loans at lower rates of 8 per cent for a fixed number of years and which eventually becomes a floating loan product. But in coming months, it becomes really expensive for the bank to provide teaser loans. This will prevent banks providing home loans at lower rates and therefore those loans can perhaps die.

• More capital for loans above Rs 75 lakh: The RBI also increased risk weight of loans above Rs 75 lakh. If the bank is giving loan above Rs 75 lakh then they will have to set aside more capital. This will again mean that banks will have to make these loans more expensive. This could increase the interest rates on loans for high-cost properties. The higher provisioning means that investing in Luxury home or Home Loans above Rs.75 lakh will become dearer over the coming months.

Loan to Value

The loan to value (LTV) ratio of a property is the percentage of the property’s value that is mortgaged. This ratio is obtained by dividing the amount of a loan by either the sale price of the property or the property’s appraised value. The lower of the two amounts is used. The higher LTV ratios mean higher risk for the lender. At present, there is no regulatory ceiling on the LTV ratio in respect of banks’ housing loan exposures. In order to prevent excessive leveraging, the RBI has proposed that loan to value (LTV) ratio in respect of housing loans hereafter should not exceed 80 per cent. It means new Home buyers will have to pay the 20 per cent of the value of a house as housing loan from their own pocket.

HFC will adhere to the same rule

Going by tradition, even other housing finance companies (HFCs) not under RBI will perhaps adhere to the same rule of margin money of 20% of the property value. This is because in the past whenever the central bank imposed some new rules related to housing loans by banks, National Housing Bank (NHB), the regulatory body for HFCs, had imposed the same conditions on these companies.

The RBI had noted that residential property prices have been rising in most cities, especially in Delhi and Bangalore. The RBI noted that growing risk perceptions and uncertainty in global markets have impacted domestic markets through two different channels – pressure for appreciation of the rupee and rise in equity prices due to sharp rise in portfolio flows.

The RBI’s measures will reduce speculative activity in the high end residential segment. The RBI has clamped down on teaser home loan rates and also increased the risk weight for housing loans above Rs. 75 lakh to 125 per cent. The RBI has said that teaser rate loans present higher risk to banks. It also said that teaser rate loans raise concerns as borrowers may not have the ability to service loans. The short-term lending rate (repo) goes up to 6.25 per cent while short-term borrowing rate (reverse repo) rises to 5.25 per cent. The increase in provisions could lead to an increase in home loan rates in coming months.

Disclaimer: The article contains data collected from various sources and the use of same is at readers discretion.

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